By Andrew Jay Rosenbaum
ANKARA
The stronger dollar will put brakes on global growth, credit agency Moody's warned in a note released Friday.
"Both the expectation and the realization of higher U.S. interest rates should send the dollar exchange rate up to new cycle highs.
"The ongoing appreciation of the dollar exchange rate stems from the U.S.’s relatively better growth outlook vis-a-vis the rest of the world. The dollar was recently up by 81 percent against Brazil's real, 46 percent versus Japan’s yen, 31 percent versus Canada's dollar, 28 percent against Mexico’s peso, 22 percent against the euro, and 21 percent versus India’s rupee.
“Moreover, according to the same serial comparison, the dollar recently was higher by 19% versus a broad basket of foreign currencies and up by 25% in terms of major foreign currencies," the note said.
The stronger dollar is expected to put pressure on commodities prices, and on manufacturers.
"Continued dollar exchange rate appreciation risks worsening the plight of countries and companies having meaningful direct exposure to industrial commodities," Moody's warned.
"The moving yearlong average of profits from current production has already slowed from the 14.9 percent of the three-years that ended March 2012 to the 3.3 percent of the three-years-ended March 2015.
“An even stronger dollar portends a further deceleration by profits, if not an outright annual contraction."
The effects of the stronger dollar are already being felt by U.S. companies.
"[In the U.S.] close to 87 percent of the S&P 500 companies that have released second-quarter results showed year-to-year setbacks of minus 4.9 percent for sales and minus 1.7 percent for operating profits.
"But, around the globe, the strong dollar will put pressure on manufacturing, retailing and wholesalers," the report said.
"Elsewhere, the annual decline by the sum of the sales of manufacturers, retailers, and wholesalers deepened from minus 1.2 percent in the first quarter to a likely minus 2.0 percent in the second quarter.
"After excluding sales of identifiable energy products, the yearly growth of core business sales ebbed from 3.8 percent in the first quarter to 2.1 percent in the second quarter."
Moody's warned that this trend will hurt overall employment. Unless sales accelerate convincingly, businesses are likely to spend more cautiously. This could lead to a rise in unemployment, the note said.
